I believe the term is "Employee-at-will". Both parties in this sort of arrangement have the right to terminate the employment without cause, so long as it doesn't violate civil rights. Smoking is an addiction, a habit started by choice, not a way of life. He can fire smokers as he pleases (as you have stated).
This will be self-correcting. If no one agrees with his policies, no one will work for him. If enough people agree to work there, then his policy seems justified. No worker is being forced to maintain employment with him, however. Time will tell how this one turns out.